VANCOUVER — With junior equity valuations falling, it seems logical the market would have increased merger and acquisition activity by larger cap miners looking to score relative bargains on quality assets. And that seems to be the case for Vancouver-based producer New Gold (NGD-T, NGD-X), which announced a friendly $310 million takeover of explorer Rainy River Resources (RR-T) on May 31.
Under terms of the acquisition agreement New Gold is offering $3.83 per share of Rainy River. New Gold would pay up to $198 million in cash with the remainder in stock on a prorated basis, to a maximum of roughly 25 million New Gold shares. The offer represents a premium of 42% to Rainy River's current share price and a 67% premium to its 20-day volume weighted average share price.
New Gold would have likely preferred an all-cash deal, but settled on an even split between cash and shares in a move that will likely appeal to Rainy River shareholders looking for longer term, value added potential.
Rainy River's namesake gold-silver project lies 65 km west of Fort Frances in the southwest corner of northern Ontario, and hosts 116 million proven and probable tonnes grading 1.08 g/t Au and 2.76 g/t Au for 4 million oz of in situ gold and 10.3 million oz of in situ silver. Perhaps more attractively, Rainy River's open pit resource totals 113 million tonnes grading 0.97 g/t Au and 2.65 g/t Au for 3.5 million oz of contained gold and 9.7 million oz of contained silver.
Rainy River has identified two stages of gold mineralization at the project to date, with the early stage associated with sulphide stringers and veins and disseminated pyrite in quartz-phyric volcaniclastic rocks and conglomerate, while late stage mineralization is associated with quartz-pyrite-chalcopyrite-gold veins and veinlets.
New Gold's timing on the acquisition comes barely a month after Rainy River hit its feasibility milestone. A study released in April outlined a 16-year open pit mine that would carry a $731 million price tag and produce 326,000 oz of gold and 494,000 oz of silver annually over its first 10 years at average cash costs of US$468 per oz of gold — including royalties and net of silver credits. All-in costs are estimated at US$771 per oz.
At a US$1,400 gold price and US$25 per oz silver price, Rainy River would carry $931 million after tax net present value and 23.7% internal rate of return.
“The Rainy River project is an asset we've been following for some time and understand very well,” commented New Gold executive chairman Randall Oliphant. “One of the things we really like about Rainy River is the location. Importantly, we have been able to achieve our growth in reserves and resources while further building upon our portfolio in Canada. At a time when less established mining jurisdictions have proven increasingly challenging, we feel very well positioned.”
Following the acquisition, New Gold's gold reserves will jump by roughly 44% per share, while measured and indicated resources will increase by about 20% per share. The company continues to target large scale gold assets in Canada, with 62% of its pro forma measured and indicated gold resources now lying within the country's borders.
Rainy River marks the second major Canadian acquisition for New Gold over the past two years. The company acquired the Blackwater gold project — located 160 km southwest of Prince George, BC — in June 2011 through a friendly $550 million all-share takeover of Richfield Ventures at $10.38 per share.
“I think we have the capacity to build both projects simultaneously. We already have the Blackwater team in place so there is no impact there, and we see greater availability now than we have in the last five years in terms of mining talent because so many projects have been deferred,” Oliphant added.
“And that enables us, because projects were valued a lot higher two years ago than they are today despite the fact they are lower risk. From our perspective, we view these assets as lower acquisition costs, lower risk, more advanced than they have been in years, plus there is lots of talent available to build these mines,” he said.
Oliphant explained that New Gold maintains some flexibility on both projects, and will likely make sequencing and capital decisions within 18 months based on gold price and market activity. Blackwater’s feasibility study is due this summer, while Rainy River is in the permitting stages and was scheduled to hit production by early 2016. As per a September 2012 preliminary economic assessment, Blackwater would carry a US$1.8 billion development cost.
And the asset price is definitely opportunistic for New Gold, with Rainy River's shares well off a 52-week high of $6.17, recently having fallen to a rock-bottom low of $2.04 per share in late April. Since the onset of 2013, and prior to New Gold's bid, Rainy River had lost 47% of its market capitalization and seen its equity valuation drop by $2.37 per share. Following the news of the bid on May 31, Rainy River's shares jumped 36%, or 96¢, to better reflect the acquisition premium at $3.66 per share.
Markets were less kind to New Gold, as the company's shares dropped 8.6%, or 66¢, following the news before closing at $7 per share. New Gold had 477 million shares outstanding at the time of writing for a $3.4 billion press time market capitalization. The company reported cash and equivalents of US$672 million at the end of March and generated net earnings of US$36 million, or 8¢ per share, during the first quarter.
“I think we have lots of access to capital, I mean the bond market appears wide open for gold mining companies given our successful offerings last year, and offerings by other companies," Oliphant commented, citing Barrick Gold's (ABX-T, ABX-N) US$3 billion debt security sale in early May.
"We're approached regularly by banks about expanding the size of our revolver and things. These projects generate good returns and are in decent jurisdictions, so there are plenty of people interested in financing them if we can't do those ourselves internally,” he concluded.
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